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There is another more subtle, but at least equally important, reason for international trade. This is what economists call "comparative advantage."

Comparative Advantage

To illustrate what is meant by comparative advantage, suppose that one country is so efficient that it is capable of producing anything more cheaply than another country. Should the two countries trade? Yes.

Why? Because, even in an extreme case where one country can produce anything more cheaply than another country, it may do so to varying degrees. For example, it may be twice as efficient at producing chairs but ten times as efficient at producing television sets. In this case, the total number of chairs and television sets produced in the two countries combined would be greater if one country produced all the chairs and the other produced all the television sets. Then they could trade with one another and each end up with more chairs and more television sets than if they each produced both products for themselves.

As economists would say, country A has an "absolute advantage" in producing both products but country В has a "comparative advantage" in producing chairs while A has a "comparative advantage" in producing television sets.

Let's look at this on a small, human scale. Imagine that you are an eye surgeon and that you paid your way through college by washing cars. Now that you have a car of your own, should you wash it yourself or should you hire someone else to wash it— even if your previous experience allows you to do the job more efficiently than the person you hire?

Obviously, it makes no sense to you financially, or to society in terms of over-all wellbeing, for you to be spending time sudsing down a car instead of being in an operating room saving someone's eyesight. In other words, even though you have an "absolute advantage" in both activities, your comparative advantage in treating eye diseases is far greater.

The key to understanding both individual examples and examples from international trade is the basic economic reality of scarcity. The surgeon has only 24 hours in the day, like everyone else. Time that he is spending doing one thing cannot be spent doing something else. The same is true of countries, which do not have an unlimited amount of labor, time, or other resources, and so must do one thing at the cost of not doing something else.

Comparative advantage is very important not only in theory but in practice. It has been more than a century since Great Britain produced enough food to feed itself.

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Britons have been able to eat only because the country has concentrated its efforts on producing those things in which it has had a comparative advantage, such as manufacturing, shipping, and financial services — and using the proceeds to buy food from other countries.

British consumers end up better fed and with more manufactured goods than if the country grew enough of its own food to feed itself. Since the real cost of anything that is produced are the other things that could have been produced with the same efforts, it would cost the British too much industry to put enough efforts into agriculture to become self-sufficient in food. They are better off getting food from some other country whose comparative advantage is in agriculture, even if that other country's farmers are not as efficient as British farmers.

Economies of Scale

While absolute advantage and comparative advantage are the key reasons for benefits from international trade, they are not the only reasons. Sometimes a particular product requires such huge investment in machinery and in developing a skilled labor force that the resulting output can be sold at a low enough price to be competitive only when some enormous amount of output is produced, because of what economists call "economies of scale."

If General Motors produced only a hundred Chevrolets, the cost per car would be astronomical, since all the expensive machinery and all the engineering research and development that went into creating the automobile would have to be recovered from the sale of just 100 vehicles. However, by spreading these fixed overhead costs over hundreds of thousands of Chevrolets, the cost per car shrinks to a fraction of what it would be otherwise, and thus it can be sold at a price that enables it to compete in the marketplace. It has been estimated that the minimum output of automobiles needed to achieve an efficient cost per car is somewhere between 200,000 to 400,000 automobiles per year.

Producing in such huge quantities is not a serious problem in a country of the size and wealth of the United States. But, in a country with a much smaller population— Australia, for example— there is no way to sell enough cars within the country to be able to develop and produce automobiles from scratch to sell at prices that would compete with automobiles produced in much larger quantities overseas. The largest number of cars of a given make sold m Australia in 1996 was 112,000 Fords, well below the quantities needed to reap all the cost benefits of economies of scale.

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The Australian government's program to gradually reduce tariffs on imported cars has been bitterly opposed by the domestic automobile manufacturers, who would have to compete with automobiles produced more cheaply overseas. Such competition has been estimated to cost thousands of jobs in Australia and some analysts say that it would probably force all four Australian automobile producers out of business. Even the cars that have been manufactured in Australia have been developed in other countries—Ford and General Motors cars from the United States and Toyotas and Mitsubishis from Japan. They are essentially Australian-built American and Japanese cars/ but they lack the economies of scale that are possible in the much larger markets in the United States and Japan.

Exports enable some countries to achieve economies of scale that would not be possible from domestic sales alone. Some companies make most of their sales outside their respective countries' borders. For example, the Dutch retailer Royal Ahold has more than two-thirds of its sales outside of the Netherlands and the Swedish retailer Hennes & Mauritz has more than four-fifths of its sales outside of Sweden. While the American retailer Wal-Mart has larger overseas sales than either of these two companies, more than four-fifths of Wal-Mart's sales are in the huge American market, where it can realize great economies of scale domestically. But small countries like South Korea and Taiwan depend on international trade to be able to produce on a scale far exceeding what can be sold domestically.

In short, international trade is necessary for many countries to achieve economies of scale that will enable them to sell at competitive prices. For some products requiring huge investments in machinery and research, only a very few large and prosperous countries could reach the levels of output needed to repay all these costs from domestic sales alone. International trade creates greater efficiency by allowing more economies of scale, as well as by taking advantage of each country's absolute or comparative advantages.

Over time, even the comparative advantages change, causing international production centers to shift from country to country. For example, when the computer was a new and exotic product, much of its early development and production took place in the United States. But, after much of the technological work was done that turned it into a widely used product that many people knew how to produce, the United States retained its comparative advantage in the development of computer technology and software design, but the machines themselves could now easily be assembled in poorer countries overseas—and were.

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Those who think of American production moving overseas as a loss of jobs in the United States have been proved wrong by the facts, as the number of American jobs increased and unemployment rates fell while all these jobs were being "lost." But the opaque facts are not enough. What also needs to be understood is why things happened this way, when so many politicians and journalists painted an entirely different picture when making their dire predictions.

Labor is one of innumerable scarce resources which have alternative uses. The computer software industry in the United States could not have expanded so much and so successfully if all American computer engineers were tied down with the production of machines that could have been just as easily produced in some other country. Since the same American labor cannot be in two places at one time, it can move to where its comparative advantage is greatest only if the country "loses jobs" where it has no comparative advantage. That is why the United States could have unprecedented levels of prosperity and rapidly growing employment at the very times when media headlines were regularly announcing lay-offs by the tens of thousands in some industries and by the hundreds of thousands in others.

Desperate attempts to salvage their wrong predictions have led some to assert that the new jobs were only low-wage jobs "flipping hamburgers" and the like. But if Americans in general were losing higher-paid jobs and being forced to take lower-paid jobs, how then could the American standard of living have continued to rise, as all data show? In reality, when the shifting of low-skill jobs to other countries enables an American company to become more profitable, it can then afford to hire Americans for higher-skill jobs. It is not a zero-sum game when there are more total resources available after the shift.

While it is undoubtedly true that some particular individuals, or even many employees of some particular firms or industries, may have lost ground during the transition, we cannot commit "the fallacy of composition" and assume that what is true for some is true in general. The rise in the general level of real income in the United States means that the gains have clearly outstripped the losses. But, where those who lose jobs are organized, their complaints carry more political weight.

Terms of International Trade

When you read business periodicals or listen to news reports, you will see and hear terms relating to international business. Many of these terms may be familiar to you, but it will be helpful to review them before we discuss international business in more detail.

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Balance of Trade. The balance of trade is the relationship of exports to imports. A favorable balance of trade occurs when the value of exports exceeds imports. An unfavorable balance of trade or trade deficit occurs when the value of imports exceeds exports. It is easy to understand why countries prefer to export more than they import. If sell you $200 worth of goods and buy only $100 worth, I have an extra $100 available to buy other things. However, I’m in an unfavorable position if I buy $ 200 worth of goods and sell only $100.

Balance of Payment. The balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows other factors such as tourism, foreign aid, and military expenditures. The amount of money flowing into or out of a country for tourism and other reasons may offset a trade imbalance. The goal is always to have more money flowing into the country than flowing out of the country. This is called a favorable balance of payments. In 1987, the United states had an unfavorable balance of payments of about $161 billion – that is, the amount of money flowing out of the U.S. was about $161 billion more than the money flowing into the country.

Dumping. Dumping is the practice of selling products in foreign countries for less than you charge for the same products in your own country. South Korea, for example, has been accused of such dumping practices. The United States has laws against dumping, specifying that foreign firms must price their products to include 10 percent overhead costs plus 8 percent profit margin. Dumping is hard to prove, however. Charges of dumping have been made against manufacturers of several products, including steel, motorcycles and microwave ovens.

Trade Protectionism. Trade protectionism is the use of government regulations to limit the import of goods and services. Countries often use trade protectionism measures to protect their industries against dumping and foreign competition that hurts domestic industry. Protectionism is based on the theory that such practices will help domestic producers survive and grow, producing more jobs. We shall discuss trade protectionism in detail later.

Exchange Rate. The exchange rate is the value of one currency relative to the currencies of other countries. High value of the dollar means that a dollar would buy more foreign goods (or would be traded for more foreign currency) that normal. Lowering the value of the dollar means that a dollar can buy less overseas than it once did. That makes foreign goods more expensive because it takes more dollars to buy them. It also makes American goods cheaper to foreign buyers because it takes less

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foreign currency to buy American goods. The net effect is to sell more overseas and buy less foreign products, lessening the trade deficit.

Much has been said in the business journals about the exchange rate of the dollar against foreign currencies all through the 1980s. The reason for the discussion is that the value of the dollar was so high in the early 1980s that foreign goods were cheaper to buy. U.S. citizens began buying more overseas, which hurt the U.S. balance of trade. A “group of five” countries (U.S., Britain, France, West Germany, and Japan) banded together to lower the value of the dollar and thus (1) increase the export market for U.S. goods and (2) decrease imports. That effort was successful. At the end of the decade, the value of the dollar rose again, threatening to increase the trade deficit.

Vocabulary and language focus.

Define the following terms.

1.International trade

2.Comparative advantage theory

3.Absolute advantage theory

4.Balance of trade (favorable / unfavorable)

5.Balance of payments

6.Dumping

7.Trade protectionism

8.Exchange rate

9.Export

10.Import

11.Economies of scale

1.Find words and phrases in the text, which mean the same as the following

1)to render smth cofused or obscure

2)to work well, quickly and without waste

3)money spent regularly to keep a business running

4)able to provide what one needs without outside help, esp. (of a country), without buying goods and services from abroad

5)starting from the beginning or with nothing

6)to get a return, recompense after spending money

7)to pay back or refund

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merchandise trade in the US. Services, such as banking, insurance, tourism, and technical expertise, are invisible imports and exports. A country can have a surplus or a deficit in its (3) difference between total earnings from visible export and total expenditure on visible imports, and in its (4) difference between total earnings from all exports and total expenditure on all imports. Most countries have to pay their deficits with foreign currencies from their reserves, although of course the USA can usually pay in dollars, the unofficial world trading currency. Countries without currency reserves can attempt to do international trade by way of (5) direct exchanges of goods a without the use of money. The (imaginary) situation in which a country in completely self-sufficient and has no foreign trade is called autarky.

The General Agreement on Tariffs and Trade (GATT), concluded in 1994, aims to maximize international trade and to minimize (6) the favoring of domestic industries. GATT is based on the comparative cost principle, which is that all nations will raise their income if they specialize in producing the commodities in which they have the highest relative productivity. Countries may have an absolute or a comparative advantage introducing particular goods or services, because of (7) inputs (raw material, cheap or skilled labor, capital, etc.), (8) weather conditions, (9) specialization of work into different jobs, (10) savings in unit costs arising from large-scale production, and so forth. Yet most governments still pursue protectionist policies, establishing trade barriers such as (11) taxes charged on imports, (12) restrictions on the quantity of imports, administrative difficulties, and so on.

5. Listen to the economist from Organization for Economic Cooperation and Development (OECD) explaining why countries trade and answer the following questions.

1.What does the speaker compare countries to?

2.What activity does he give as an example?

3.Why does it make sense for countries to trade?

5. Discuss the following questions:

1.Does your country have a trade surplus or deficit?

2.Does it have a balance of payments surplus or deficit?

3.What are its chief exports?

4.Which industries or sectors are protected?

5.Which do you think should be protected?

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II. MULTINATIONAL CORPORATIONS

The term 'multinational' is used for a company, which has subsidiaries or sales facilities throughout the world. Another expression for this type of business enterprise is 'global corporation'. Many of these giant organizations are household names such as Coca Cola, Heinz, Sony, Hitachi, IBM, Akzo and General Motors. Companies like these control vast sums of money and they operate in countries with widely differing political and economic systems.

Looking back into history, we can find two main reasons for the development of multinationals. Firstly, when companies found that their national markets had become saturated, they realized that they could only increase profits by setting up subsidiaries abroad. Secondly, if a country set up trade barriers — usually tariffs or quotas — against a company's products, then the only alternative for the company was to establish a factory or sales organization in the country concerned.

More recently, the economic boom of the 1960s led to a rapid growth of globetrotting enterprises. In the highly industrialized countries rising incomes attracted the multinationals; in the developing countries, the availability of cheap labor lured many companies into building new factories and assembly plants. In earlier times, most countries gave the multinationals a 'red carpet' welcome because they saw such foreign investment as creating much-needed employment, stimulating the business sector generally, and possibly earning foreign currency if the company's products were exported. More recently, however, the tide has turned against the multinationals. They are now viewed by many with suspicion; once heroes, they are now villains on the international business stage. For reasons outlined below, host countries are now restricting the activities of their guests, the multinationals. Many developing countries will only allow new investment if it is on a joint-venture basis. Other countries, e.g. India and Nigeria, are forcing foreign companies already well-established to reduce their shareholdings to a certain percentage, say 60% or 40% of the total equity of the company. At international level, various attempts have been made to regulate the activities of the multinational. The most gentlemanly of these has been the OECD’s guidelines on multinationals: a kind of book of etiquette advising companies how to behave in public. The code, being voluntary, is not legally enforceable. Tension between host country and multinational is inevitable in many cases because multinationals do pose a threat to national sovereignty.

The multinational is big and rich. It often operates in industries which are difficult to enter and of vita! national importance, e.g. the computer, chemical and automobile industries. Most important of all, the main objective of the multinational is to organize

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its activities around the world so as to maximize global profits and global market shares. Each subsidiary is part of an international network of affiliates. These all interact with each other. Each part serves the whole. The centre controlling the network — the multinationals' headquarters — is not under the control of the host government. It is frequently thousands of miles away from these subsidiaries.

To illustrate this principle of interaction between affiliates, we can take the example of the Canadian company, Massey Ferguson. It can make tractors in the USA, for sale in Canada that contain British engines, French transmissions and Mexican axles: all products of the company’s subsidiaries. IBM is another company, which is transnational in scope. A typical 360-series computer may include components from four or five countries.

In recent years, governments have had to ask themselves whether multinationals are harming their national interests. In highly industrialized countries, a major source of worry has been that these foreign giants will take over smaller companies and gradually dominate an important industry. If this happens, vital decisions affecting the economic interests of the country may be taken in boardrooms thousands of miles away from that country. The danger of this kind of domination is perfectly exemplified by a controversial takeover, which occurred in France. In 1966, the French computer company Machines-Bull had 66% of its stock bought up by General Electric. This meant in effect that France no longer had it’s own computer industry. As a result, the

French government felt bound to set up its own data processing and computer concern, which cooperated closely with the German company Siemens and the Dutch company Philips. Undoubtedly, governments are uneasy when they feel that decisions affecting plants and employment in their countries are being made by remote control. Furthermore, unions often feel that their bargaining power is weakened when they have to deal with people operating from remote decision centres.

Developing countries, in particular, have become concerned about their dependence on foreign investment in key sectors of their economy. They have become aware that foreign subsidiaries often take most of their profits out of the country rather than reinvest them in the company. Sometimes, the flow of funds causes disastrous fluctuations in the exchange rates of their currencies. Certain countries have accused the multinationals of political interference. The classic case of this is, of course, the intrusion of ITT (International Telegraph and Telephones) in the political affairs of Chile. This huge conglomerate, involved in every area of industrial and banking activity, was ready to finance attempts to overthrow the Marxist government of the Communist leader, Salvador Allende. To gain greater control over their industry, some

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countries, as already mentioned, are beginning to insist on joint ventures. The disadvantage of this tactic is that the foreign subsidiary may then be treated less favorably, in terms of technical assistance and capital investment, by the parent company. Another strategy used by governments is to limit the amount of profits that a foreign subsidiary may repatriate in a given period. Arguing against multinationals, critics cry in shrill tones that these organizations engage in anti-competitive activities, insensitively shut down plants, make huge bribes to gain contracts, interfere politically, destabilize currencies, underpay their workers, etc. Those speaking for the defense see these corporations almost as international agencies, promoting peace, providing better, cheaper products, and bringing much needed resources, expertise and employment to the host countries.

Vocabulary and language focus.

1.Find words and phrases, which mean the same as the following

1) names familiar to almost everyone

2) a sudden increase in business activity (when business activity declines sharply, the term used is slump)

3) to establish subsidiary

4) to attract

5) to welcome warmly, to give lavish hospitality

6) informal rules or instructions on how smth should be done 7) to be legally accomplished

8) to be the cause of (smth difficult to deal with ); to present 9) to increase (profits) to the greatest possible size or amount 10) to feel an obligation to

11) frequent change (in exchange rate)

12) to bring or send (someone) back to their own country

2.Find an appropriate word for each blank space. In all sections the initial letter of each word is provided

a)Most multinational companies are vast enterprises with networks of s…….. or a…….. throughout the world. Originally they expanded overseas because trade barriers such as t…….. and q…….. had been set up against their goods.

b)When incomes are rising and business is thriving, in other words, when there is an e…….. b…….. in a country, a multinational may decide to establish a s……. there.

Later, however, the government of the country may only allow the company to operate on a j……... v…….. basis, in which case it will compel the company to

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reduce its s…….. to a fixed percentage. It could even restrict the subsidiary by allowing only a fixed proportion of profits to be r……..

c) The OECD code gave g…….. on how multinationals should behave. None of its provisions were l…….. e…….. and therefore some say it lacked legal teeth.

2. Complete each sentence using an appropriate form of the word in italics

a)enterprise - What we need at the moment is an …….. manager.

b)differ - The two products look, taste and feel the same. It is impossible to …….. between them.

c) basis - She needs more experience, but ...... she is a first-class buyer.

d) tension - When I asked for an increase in salary, the atmosphere here became

g)intrusion - A good chairman in a meeting should not be too ……..

h)strategy - This area is of great...... importance in our promotional campaign.

3. Circle the number next to the most appropriate answer

1) When a market becomes saturated

a) it allows a new company to enter easily and quickly.

b) it offers no potential for a company to develop its sales. c) it immediately begins to attract foreign investment.

2) Globe-trotting enterprises are those which

a) prefer to operate in foreign markets rather than domestic ones. b) seek to expand their business activities by setting up organizations abroad.

c) believe that greater profits are to be earned abroad than in their own countries.

3) The best definition of a developing country is that

a) it is at a very high level of economic and social development.

b) it is still in the process of becoming a highly industrialized nation. c) it is still at a stage well below its maximum economic potential.

4) One difference between a conglomerate and an affiliate is that the former a) usually has a more complex organization and engages in

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diverse business activities.

b)is always more stable financially and more profitable.

c)is a large organization which only engages in international trading.

Understanding the main points.

1.What are some of the main characteristics of multinational companies?

2.Host countries used to look upon the multinationals as 'heroes'. Why?

3.Multinationals have been accused of decision-making by remote control. What does this phrase mean? State briefly some of the problems that can arise from this practice.

4.Some governments have begun to insist that foreign companies can only operate in their country on a joint venture basis. What can be gained and lost by such a policy towards foreign investment?

Listening

You are going to watch the interviews with former CEOs of big global companies. While watching take notes and be ready to answer the following questions after.

1.What is globalization according to Dick Brown, former CEO of Cable and Wireless? 2.What three contradictions is former CEO of ABB Percy Barnevik talking about? 3.How can a company go global?

4.How can a company make theory work in practice when going globally?

Communication skills

Role play.

A television broadcasting organization has invited a small group of multinational executives to participate in a panel discussion. They are to start the ball rolling by speaking in support of the following debating scheme:

Multinationals are, on balance, a force for good in the world and strong restrictions on their activities are unnecessary.

A critical studio audience has been assembled to challenge the views of the executives.

A neutral chairman will guide the discussion. An eminent politician will listen to the debate, sum up at the end and choose the most effective group – executives or studio audience.

A studio manager will organize the debaters and will have the right to speak when necessary.

Enact this television debate.